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Why a core-satellite investment strategy makes sense

10 June 2013 Fiona Zerbst
Andrew Rumbelow, CIO at Sanlam Multi Manager International.

Andrew Rumbelow, CIO at Sanlam Multi Manager International.

Helena Conradie, CIO of SATRIX.

Helena Conradie, CIO of SATRIX.

Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

Patrice Rassou, head of Equities at Sanlam Investment Management.

Patrice Rassou, head of Equities at Sanlam Investment Management.

The recently held Sanlam Benchmark Symposium hosted some lively panel discussions. Andrew Rumbelow (CIO at Sanlam Multi Manager International), Helena Conradie (CIO of SATRIX, fully owned by Sanlam Investments) and Patrice Rassou (head of Equities at Sanl

"Over the years, the debate has moved on – one can obviously employ both active and passive strategies and the multi-manager business focuses more on what proportion should be passive, rather than whether passive should be included or not," said Rumbelow. Investors have driven the demand for cost-effective products and the huge growth in product choices reflects how far we’ve come since the first index fund came into being in 1975, courtesy of John Bogle (the Vanguard 500 Index Fund, the first index mutual fund available to the public).

Conradie pointed out that passive and active strategies are complementary, not alternative, offerings and managers should be cognisant of the ‘smart beta’ concept, which blends an active investment strategy with access to lower-cost index tracking funds. “The market has different sources of return such as value, momentum and low volatility. These sources are no longer the domain of active management only and an index can capture this exposure as well,” said Conradie.

Alpha is a hope, cost is a fact

The panelists agreed that a manager’s ability to outperform benchmark is unpredictable, good track record notwithstanding. It should therefore be more important to a manager to meet a client’s needs than to outperform per se; in part, this can be done by blending strategies and keeping costs low. “Alpha is a hope. Cost is a fact,” Conradie pointed out.

The idea is to move away from ‘one solution’ thinking and consider what is best for client. “Trustees need to consider what solution is most appropriate for members,” said Rumbelow. “They need an asset base they can retire with. It is up to the board of trustees to decide – if they want to go ‘value’, they can then choose if they prefer an active or passive strategy in this space.” Value-sector exposure can, of course, be obtained by tracking an index, and not just through an active manager.

Rassou said he favoured the value philosophy and Conradie pointed out that value is a long term strategy and investors should be aware that it can also underperform over the short term.

Be true to label

Rassou said managers should offer a range of choices but be ‘true to label’ and stick to a tried-and-tested investment philosophy. “Don’t switch funds every couple of years,” he cautioned. Reiterating that we don’t know what the equity market will have to offer in years to come, value to client will be in robust processes and good organisational structures, which will up the chance of delivering better performance.

Perhaps surprisingly, investors still favour active management styles – about 95% of all long-term fund assets in South Africa are invested in actively managed unit trusts and cash flows are heavily weighted in favour of actively managed funds. We are proving slower to adopt passive strategies than Europe and the US, for example.

Rassou made the point that index products do not yet weigh in heavily in favour of environmental, social and governance (ESG) factors, so responsible investors may not yet consider these products. Perhaps the reality is that investors still believe passive investing is limited to basic market cap-weighted All Share Index-type funds, despite the fact that there are a fairly wide variety of products now available.

A ‘core-satellite’ investment model – passively managed index products combined with traditional active managers –provides exposure to a diversified range of beta and alpha sources, said Conradie, and over time has shown to deliver performance at lower cost. This offers compelling evidence for active and passive blending.

Editor’s thoughts:
It seems odd that we should even have to debate whether or not passive investment strategies have a place in portfolio construction; but perhaps South African investors will come around in greater numbers over the next few years. What is interesting is that Sanlam believes index products should be incorporated into investment strategy as a matter of course, having recognised their value. Do you believe index products should be taken more seriously in the investment space? Comment below or email


Added by Five, 10 Jun 2013
Surprise!!! Of course Sanlam would suggested a mix .. since they now own Satrix? Is this a change of heart or theory ?
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